Political Action affects CT LTCI rate approval

The Event

On Feb 19, 2021, the Conn. Dept. of Insurance approved a 25% rate increase for a subset of (3) Brighthouse policy forms (PF). The approval was half of the 50% requested. On the surface, this appears routine – a carrier asks more, gets less. We have covered Brighthouse (BHF) extensively since it is emblematic of legacy LTCI Industry core issues. It is our Whipping Boy because it is so far off-the-range and makes a terrific case study for what is wrong with legacy LTCI.

The problem

In Dec. 2019, the carrier actuaries made the case that all its 13 books were really the same thus justified a pooled filing. In the filing, all books were subject to a startling +173% rate increase. Do the math. The actuaries are suggesting in the aggregate 13 PFs were priced at 37% of their fair value.

CT DOI rejected that filing since LTC4 had a few months earlier received a rate increase. Later, the pooled-filing was subsequently forked into two separate pooled filings, LTC4 (3 PFs) and pre-LTC4 (10 PFs).

The filing just now adjudicated was for LTC4. Two months ago, pre-LTC4 received a 50% increase based on an asked for +173%. The actuaries must have thought that in asking for a 50%, this submission would be a layup.

On a segregated basis, our metrics show LTC4 is clearly a worse performer in terms of loss ratio than pre-LTC4. LTC4 increases should be larger than pre-LTC4. The more than 4,000 pre-LTC4 policyholders have been had. Oh well, what’s new!?

We believe the ruling was politically motivated, not actuarially justified, a term automatically thrown out against any consumer objections.  This is potential welcoming news for all LTCI consumers. This case may have set a precedent to doom the phrase actuarial justification as a regulatory argument.

The Political Action relates to an organized effort by an angry CT consumer mob. One can read about this in the rate filing final disposition. But there is more to the story. Later.

How much are you being ripped off?

The average legacy LTCI policyholder is being ripped off.

By how much?

The Book of Business is the primary determinant of your current and potential loss. We use data found in rate filings to calculate average and aggregate loss per policyholder.

The term Economic Harm Modeling (EHM) was first introduced in the Skochin v. Genworth settlement discussion. EHM identifies policyholder loss exposure as result of the industry’s pricing practices.

EHM has 3 distinct components:

  1. Present Value (PV) past overcharges due to premiums that exceed a fair premium (SDN);
  2. PV loss due to future premiums that exceed SDN;
  3. Average PV loss due to forced lapsing; In a rate filing, carriers frequently express what percent of policyholders are expected to abandon their policies.  Lack of trust of the so-called insurance relationship is a leading cause of lapsing.

A fair premium (SDN) acknowledges carriers’ contractual right to reprice LTCI premiums given claims history and projection. However, SDN does not acknowledge the industry has the right to chargeback existing policyholders for past underpricing. In 2018, a group of actuaries seem to have admitted what was going on, a little late in the day.

For component #2, it is important to differentiate which premium is being compared to the SDN. Is it the current premium that a regulator has already granted? Or, is it the premium we expect will ultimately be granted because the Book is still underpriced by industry methods? For the latter, we use a Shock Lapse Premium (SLAP).  SLAP is an instant repricing of the Book to meet its minimum statutory lifetime loss ratio (60% in CT).

Case of Economic Harm Modeling

This is a case of nearly 4,000 policyholders in CT. The Book’s SDN is 2.94x original premium in the aggregate. We estimate an average loss of $13.0K due to loss components #2 above as premiums will be stepped up (4.13x original) starting in 2021. This will result in a 29% chargeback. The carrier has indicated a forced lapse rate of 2.3%. Given the average contract value of $60,572, component #3 loss is $1,393 for a total average expected loss of $14.4K. Across the state, the net economic loss to seniors is approximately $56 million. If the Book were repriced to its SLAP of 15.75x original, the loss would grow to $101K per policyholder. The future does not look particularly bright for policyholders in this book.

This Book does not yet have a component #1 loss. Others do. We believe that component #1 loss will increase rather dramatically for all legacy LTCI products.

Other stakeholders

Here is a list of all states offering tax incentives for LTCI. If a premium contains pricing elements that are not in fact fair premium, a portion of the tax credits or deductions given are for a different purpose than what might have been intended. Who gains and who loses? More work on this question is needed.

We hope to report on other cases as our research evolves.


8-K LTCI Filing Gambit

LTCI SEC filings

What is the process when an LTCI carrier is found to be under-reserved? The 8-K filing offers teaching points of the LTCI Gambit. Here is a recent one from UNUM.

“On May 4, 2020, the Company announced that in connection with a financial  examination of its Maine domiciled Unum Life Insurance Company of America (“Unum America”) subsidiary, which is expected to close at the end of the second quarter, the Maine Bureau of Insurance (the “MBOI”) has concluded that Unum America’s long-term care statutory reserves are deficient by $2.1 billion as of December 31, 2018. As permitted by the MBOI, Unum America will phase in the additional statutory reserves over seven years beginning with year-end 2020 and ending with year-end 2026. The 2020 phase-in amount is estimated to be between $200 million and $250 million. This strengthening will be accomplished by the company’s actuaries incorporating explicitly agreed upon margins into its existing assumptions for annual statutory reserve adequacy testing. These actions will add margin to Unum America’s best estimate assumptions. The Company plans to fund the additional statutory reserves with expected cash flows. The Company’s long-term care reserves and financial results reported under generally accepted accounting principles are not affected by the MBOI’s examination conclusion.

The Company has suspended its current share repurchase authorization and will not repurchase shares in 2020. Additionally, the Company intends to continue to pay its common stock dividend at the current rate.

How much was the share repurchase program costing over the past 3 years? This answer can be found in a recent 10-K Cash Flow from Operating Activities – about $1.2 billion. Add dividends for $0.6 billion bringing the total up to $1.8 billion over 3 years.

Proposed Carrier Best Practices

What do we propose as the best practice for carriers?

  • First, get into an under-reserved state ($2.1 billion will do just fine) by instituting a share buyback program to boost share prices; offer rich dividends too;
  • Be found to be in an under-reserved status by regulators;
  • Admit to the under-reserved state and embark on a multi-year plan to close the reserve gap;
  • Keep chaos at a minimum by 1 change at a time – i.e. maintain the dividend;
  • Institute a cash flow program to pay into reserves, by charging your policyholders; have the regulators enthusiastically support the cash flow program by passing rate increases & crying the insolvency wolf;
  • When the all-clear signal is given, resume the share buyback program;
  • Hope nobody notices.

That’s a plan!

Group CT Partnership +299% filing

Here’s a good start seen in the filing MEAM-131987416 (Policy Form GMB96/CT, inception year 1997) affecting 1,268 CT state workers. Med America, the reinsurer states, “although a substantially larger increase would be needed to return this policy form to its expected loss ratio, the company is limiting its premium rate increase to 299%” (to a lifetime loss ratio of 94%). Since this is the first rate increase ever, the CT DOI grants +50% this time out. By: (1.) the reinsurer not asking for the full increase (which would have brought premiums to 4x original), and (2.) by CT DOI being stingy, the Catch Up damage is significantly worse for policyholders. We show, by our methods, that policyholders of GMB96/CT could in theory be charged 9x original premium. This assumes carriers are permitted to chargeback existing policyholders for underpricing the past 23 years. On the other hand, we believe fair premium is 2.16x without chargebacks.

Is there a problem? Hard to say. It all seems in keeping with the plan to enable UNM to resume their stock repurchases.

Update June 29, 2020

To the CT DOI in May, I inquired whether the DOI reviews the type of UNUM practice in adjudicating rate filings. Asked, not answered (“what happened to UNUM’s response”?), the short of it is “no”. Previously, the CT DOI in public forum has asserted policyholders have an obligation to pay higher (exorbitant) rates to ensure LTCI carrier(s) do not go insolvent. In CT, LTCI carriers can count on the regulator’s support for future rate increases if their reserves are depleted due to share buybacks or excess payment of dividends. So why not? This practice appears to have been green-lighted.

Discriminatory Integrated Filings

Discriminatory integrated filings may be a way of your LTCI mess, but only if you are part of an integrated filing and only if you are hardy.

Recently, I have been asked about the fairness of integrated filings. Transamerica, an LTCI carrier with 50 books, has used an integrated filing (IF) approach since 2009.

What is an integrated filing (IF)?

Nearly all LTCI carriers have more than 1 Book of business. An IF combines several books into one logical filing. By that, we mean the Master Exhibit values represent the sum of premiums & claims across all books. The lifetime loss ratio that drives rate adjudication is calculated accordingly. To be sure, other filings combine books under one cover (SERFF-ID) but the books are logically separate.

Transamerica and Brighthouse are known to use IF. Other carriers may use IF in the future.

Administrative efficiency and lower cost is one reason to use IF. The question I was asked is whether it is discriminatory. Most people would intuitively answer this question “Yes”! Is there a data science technique to answer this question?

First, if every filing for a rate increase has been integrated for over a decade as in Transamerica’s case, the task would be to somehow disassemble the filing into its 50 component books. This is a monumental, mind boggling task. The carriers hold the cards by not releasing details.

Brighthouse in the past two years evolved to an IF from 13 book filings. Key conclusions from a research experiment looking at this case reveal:

    • Books that have a low ratio of current rate : SDN (fair rate) just prior to integration are treated very favorably, having escaped a high potential premium had they stayed on their own. These tend to be underperforming books that we sometimes refer to a trash.
    • By contrast, books that have a high ratio just prior to integration are treated very unfavorably. Why is this? They are subsidizing the trash to the degree of a trash’s weight.

An integrated filing is a zero sum game for consumers. Unless all (13 or 50) books perform the same, you have winners & losers. If you are a winner, do not rock the boat. If you are a big loser, consider rocking the boat.

Integrated filings are discriminatory

How you do know if you are a loser or winner? Without any data we have a rule-of-thumb: If you had reason to believe you were winning before, you probably just lost. Vice versa. Rule-of-thumbs lack certainty. If certainty is necessary, the required data together with a computational task is required to derive SDN to be conclusive on discrimination and financial loss. We do that for stakeholders when there is an incentive.

Here is where it can get nasty

What about the questioner who wants clarity. Have they been on the losing end subsidizing the trash? What is the loss in hard dollar terms? I say to them, you need to acquire the most recent filing of all 50 books. One could do the same experiment as was done for Brighthouse.

Just ask for the 50 filings. Say you have a right to know. You know that I am kidding, right!?

Another approach is to ask the carrier (or DOI) to disassemble your policy history to determine you have been treated fairly. What is their criteria that your book has not been unfairly treated? Shouldn’t this be stated in the filing already?

Simplest approach: If the carrier (or DOI) is unable or unwilling to track it through, then you may have a claim that your Original Policy Assumption (Methodological Quirk) stands. What would that mean exactly? OPA’s were designed to meet minimum statutory loss ratio. You are back to square 1.0 x your original premium. Forever.

Wouldn’t mind hearing an intelligent rebuttal or two as this is untested.

Final thought: Brighthouse is not the subject of this post. It is the perfect case to respond to a policyholder’s inquiry.

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